For a new issue of municipal bonds, especially from a smaller locality, a liquid secondary market may not develop immediately. This creates liquidity risk, meaning the investor might not be able to sell the bond quickly or might have to sell at a significant discount. While the other risks are valid for bonds in general, the scenario specifically highlights the short-term need to sell a *new* issue, making liquidity the primary concern.

A limit order instructs the broker to execute a trade only at a specified price or better. A buy limit order ensures the investor will not pay more than their set limit price, protecting them from an unexpected price surge. A market order executes immediately at the best available price, with no price guarantee.

For a Joint Tenants with Rights of Survivorship (JTWROS) account, the defining feature is that upon the death of one party, ownership of the entire account passes directly to the surviving tenant(s) by operation of law. The firm should update the account registration to reflect the surviving owner(s). No court order or liquidation is required for this transfer.

Suitability is a cornerstone obligation. Even with a firm recommendation and discretionary authority, the representative (and the firm) must ensure that any transaction is suitable for that specific customer based on their investment profile (objectives, risk tolerance, financial situation, etc.). Discretion does not absolve the rep of the suitability requirement.

A credit downgrade indicates the rating agency believes the issuer’s ability to meet its financial obligations has weakened. To compensate new buyers for this increased risk of default, the bond’s price in the secondary market will typically fall, which increases its yield to maturity. Existing holders see a capital loss if they sell.

The CIP, required by the USA PATRIOT Act, is the firm’s procedure to verify the identity of individuals wishing to conduct financial transactions. It is a defensive first step to prevent money laundering, terrorist financing, and other illicit activities by ensuring the firm knows with whom it is doing business.

A callable bond gives the issuer the right to redeem the bond before maturity, usually when interest rates fall. This is a disadvantage to the investor, who faces reinvestment risk. To compensate investors for this risk, callable bonds (Bond A) must offer a higher yield compared to otherwise identical non-callable bonds (Bond B).

This scenario describes a margin transaction. The customer has borrowed funds from the broker-dealer to purchase securities, contributing only 50% of the purchase price ($2,500 / $5,000 total). The $2,500 loan is the margin. This creates leverage, amplifying both gains and losses.

A key feature of a variable annuity is that the purchaser allocates premiums among various sub-accounts (like mutual funds) whose values will fluctuate based on the performance of the underlying securities. This exposes the contract holder to market risk, unlike a fixed annuity which provides a guaranteed, insurer-declared rate.

For a new issue of municipal bonds, especially from a smaller locality, a liquid secondary market may not develop immediately. This creates liquidity risk, meaning the investor might not be able to sell the bond quickly or might have to sell at a significant discount. While the other risks are valid for bonds in general, the scenario specifically highlights the short-term need to sell a *new* issue, making liquidity the primary concern.0